Berg Says People Misunderstand Federal Tax Rules

Federal rules new to this year’s tax season will seek to close the tax gap, the unreported income that often comes from selling items on eBay or informal transactions such as mowing neighbors’ lawns.

“There is, in general, a lot of misunderstanding about what can be taxed,” said Joyce Berg, an accounting professor at the University of Iowa.

New this tax season, which runs until April 17, the deadline to file income taxes, some will receive a new form to fill out: The 1099K. It’s issued by credit card companies and PayPal to everyone who has processed a credit card transaction, including online sales. All restaurants, bars, and retail stores that accept credit cards will receive the forms, too.

“There’s a thought by the IRS and by Congress that people are selling a lot of stuff on eBay and not reporting it,” said Ken Haldeman, who owns KJH Accounting and Tax Services in Iowa City. “The purpose is to catch those people. Now you’ve got income that the IRS knows about.”

In the same vein, brokerage firms also will be required to report the amounts paid for investments, rather than only being required to report what it was sold for, as the federal rule required until last year. The purpose of the change is also to close the tax gap by making sure taxpayers’ capital gains can be calculated, Haldeman said.

A new rule designed to weed out unscrupulous businesses began at the beginning of last year’s tax season. It requires all paid tax preparers who are not certified accountants, lawyers, or actuaries to register with the Internal Revenue Service. Beginning 2013, tax preparers will have to pass a competency test before they’re allowed to file returns for taxpayers.

“If you don’t feel comfortable filling out your tax return, there are people willing to take advantage of you,” Berg said.

Examples of local tax preparers that don’t need to be licensed by the state are Liberty Tax, H&R Block, and Jackson Hewitt Tax Service, Haldeman said. Depending on how difficult the test is, some might be out of the game, he said.

Every year, a group of UI accounting and law students participates in the Volunteer Income Tax Assistance program, where volunteers attend public hours in the library and schools to provide free help with tax returns. Berg, who oversees the VITA program, said it’s a better option for people who don’t want to do it themselves because the students are well educated on the subject and must pass an IRS certification test in order to volunteer. Volunteers also make sure low- to middle-income residents take advantage of all possible tax credits they are eligible for, Berg said.

Another change taxpayers may notice is the disappearance of the Making Work Pay tax credit—of the American Recovery and Reinvestment Act, or the stimulus bill—which expired this year. The credit provided up to $400 for working singles making up to $75,000 in 2010. Taxpayers won’t see that large of a reduction in their returns, however, because the credit’s expiration will be offset by a reduction in the amount of Social Security withholding, Berg said.

The Iowa Legislature decided to permit a few tax credits for students, parents, and teachers in April 2011 but that was after many people already had submitted their 2010 tax returns, Berg said. The programs affected were a tuition and fee reduction program and another that allows K-12 teachers deduct up to $250 in out-of-pocket expenses for their classrooms. This year, people making either of those claims can either amend their 2010 returns to include those credits or add the expense onto their 2011 return, Berg said.

“In Johnson County, we have a lot of K-12 teachers, so that educator expense is important,” she said.